America's Bubble Economy Is Going To Become An Economic Black Hole

What is going to happen when the greatest economic bubble in the history of the world pops? The mainstream media never talks about that. They are much too busy covering the latest dogfights in Washington and what Justin Bieber has been up to. And most Americans seem to think that if the Dow keeps setting new all-time highs that everything must be okay. Sadly, that is not the case at all.

Right now, the U.S. economy is exhibiting all of the classic symptoms of a bubble economy. You can see this when you step back and take a longer-term view of things. Over the past decade, we have added more than 10 trillion dollars to the national debt. But most Americans have shown very little concern as the balance on our national credit card has soared from 6 trillion dollars to nearly 17 trillion dollars.

Meanwhile, Wall Street has been transformed into the biggest casino on the planet, and much of the new money that the Federal Reserve has been recklessly printing up has gone into stocks. But the Dow does not keep setting new records because the underlying economic fundamentals are good. Rather, the reckless euphoria that we are seeing in the financial markets right now reminds me very much of 1929. Margin debt is absolutely soaring, and every time that happens a crash rapidly follows.

But this time when a crash happens it could very well be unlike anything that we have ever seen before. The top 25 U.S. banks have more than 212 trillion dollars of exposure to derivatives combined, and when that house of cards comes crashing down there is no way that anyone will be able to prop it back up. After all, U.S. GDP for an entire year is only a bit more than 15 trillion dollars.

But most Americans are only focused on the short-term because the mainstream media is only focused on the short-term. Things are good this week and things were good last week, so there is nothing to worry about, right?

Unfortunately, economic reality is not going to change even if all of us try to ignore it. Those that are willing to take an honest look at what is coming down the road are very troubled. For example, Bill Gross of PIMCO says that his firm sees "bubbles everywhere"...

We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions.

And unfortunately, it is not just the United States that has a bubble economy. In fact, the gigantic financial bubble over in Japan may burst before our own financial bubble does. The following is from a recent article by Graham Summers...

First and foremost, Japan is the second largest bond market in the world. If Japan’s sovereign bonds continue to fall, pushing rates higher, then there has been a tectonic shift in the global financial system. Remember the impact that Greece had on asset prices? Greece’s bond market is less than 3% of Japan’s in size.

For multiple decades, Japanese bonds have been considered “risk free.” As a result of this, investors have been willing to lend money to Japan at extremely low rates. This has allowed Japan’s economy, the second largest in the world, to putter along marginally.

So if Japanese bonds begin to implode, this means that:

1) The second largest bond market in the world is entering a bear market (along with commensurate liquidations and redemptions by institutional investors around the globe).

2) The second largest economy in the world will collapse (along with the impact on global exports).

-$190,000,000,000,000 - The approximate size of the total amount of debt in the entire world. It has nearly doubled in size over the past decade.

-$212,525,587,000,000 - According to the U.S. government, this is the notional value of the derivatives that are being held by the top 25 banks in the United States. But those banks only have total assets of about 8.9 trillion dollars combined. In other words, the exposure of our largest banks to derivatives outweighs their total assets by a ratio of about 24 to 1.

-$600,000,000,000,000 to $1,500,000,000,000,000 - The estimates of the total notional value of all global derivatives generally fall within this range. At the high end of the range, the ratio of derivatives to global GDP is more than 21 to 1.

The financial meltdown that happened back in 2008 should have been a wake up call for the nations of the world. They should have corrected the mistakes that happened so that nothing like that would ever happen again. Unfortunately, nothing was fixed. Instead, our politicians and the central bankers became obsessed with reinflating the system. They piled up even more debt, recklessly printed tons of money and kicked the can down the road for a few years. In the process, they made our long-term problems even worse. The following is a recent quote from John Williams of shadowstats.com...

The economic and systemic solvency crises of the last eight years continue. There never was an actual recovery following the economic downturn that began in 2006 and collapsed into 2008 and 2009. What followed was a protracted period of business stagnation that began to turn down anew in second- and third-quarter 2012. The official recovery seen in GDP has been a statistical illusion generated by the use of understated inflation in calculating key economic series (see Public Comment on Inflation). Nonetheless, given the nature of official reporting, the renewed downturn likely will gain recognition as the second-dip in a double- or multiple-dip recession.

What continues to unfold in the systemic and economic crises is just an ongoing part of the 2008 turmoil. All the extraordinary actions and interventions bought a little time, but they did not resolve the various crises. That the crises continue can be seen in deteriorating economic activity and in the panicked actions by the Federal Reserve, where it proactively is monetizing U.S. Treasury debt at a pace suggestive of a Treasury that is unable to borrow otherwise.

And there are already lots of signs that the next economic downturn is rapidly approaching.

Would revenues at Wal-Mart be falling if the economy was getting better?

U.S. jobless claims hit a six week high last week. We aren't in the danger zone yet, but once they hit 400,000 that will be a major red flag.

And even though we are still in the "good times" relatively speaking, the federal government is already talking about tightening welfare programs. In fact, there are proposals in Congress right now to make significant cuts to the food stamp program.

If food stamps and other welfare programs get cut, that is going to make a lot of people very, very angry. And that anger and frustration will get even worse when the next economic downturn strikes and millions of people start losing their jobs and their homes.

What we are witnessing right now is the calm before the storm. Let us hope that it lasts for as long as possible so that we can have more time to prepare.

Unfortunately, this bubble of false hope will not last forever. At some point it will end, and then the pain will begin.

No kidding. They probably can't wait for the next leg down. Hell, with all the Bennie Bux they've got rat-holed away they could buy half the assets of the nation at 5 cents on the dollar in a really bad crash, and end up holding more land and serfs than Louis XIV ever dreamed of. We'll have to call him "Your Worship Master Dimon of Morgan" without vomiting in our mouths. Man that's gonna be tough right there.

The natural hedger always considers both sides. For example, after-tax corporate profits are higher than their historical norm because corporations pay less in taxes than was historically the case. In 1951, corporations paid almost nearly half of profits in taxes. In 1965, paid more than thirty per cent. Today, they pay twenty per cent. So maybe corporate profits are not in as much of a bubble as thought. Just a suggestion...

If corporate profits are not in a bubble, then all the knock-on effects are also, maybe, not in a bubble.

Also, most of the S&P is internationals and they get only about half their profits from the US. To this extent, they are buffered from local or even regional variations in economic behavior.

The truth is that ever since Margaret Thatcher, the world has become a place much more favorable for corporations. So maybe this time it really is different. Its worth a hedge, either way, of course.

"What we are witnessing right now is the calm before the storm. Let us hope that it lasts for as long as possible so that we can have more time to prepare."

C'mon Tylers. You sound like a Doomsday Prepper, or a bearded camel holding a sign that says "the end is near."

There are indices and denominators at work that hold all this in place. A Republican will get in office, boost our GDP to help our balance sheet, start a war with another county who is committing crimes against humanity, and we'll be fine.

Don't get me wrong.

There may be hard times when some of the ceiling collapses -- but we'll rebuild it. A big part of hedge is protection and insurance, and our country is hedged and insured. It's why all of you loons who are 100% physical in your investments have IQ's around 110 and know just enough to be sure that smarter people are running things.

If a Republician could not win the last election, all things considered, there will never be another Republican President; especially when 15 million illigelas that sat the last election out will be elligable to vote.

Precisely right. Until we have a balanced budget amendment to the Constitution which states that we can only spend as much as we raise in taxes in any given year, then democracy and financial responsibility will forever be fundamentally incompatible.

The free-shit-army will always vote for more free shit, regardless of our capacity to afford it.

None of the grass roots would ever vote for a Mass-a-two-shits republican "running to the center". If republicans put up an alternative, they could win. If they put up another McCain or Obamney, or any other centrist fascist, they won't. I will NEVER vote for a constitution-hating centrist Repugnicon - and I think there are a lot of people like me.

Repubicans need to be very careful how you run that mouth. Being assholes 24/7/365 ain't getting it. You have to show that you can produce something beside blaming the other guy for Everything. Can you dig it... no.

When the system blows reality will set in very quickly. Unrealistic expectations will vanish. People will go back to work doing something useful instead of consuming from the productive. Americans will focus on their kids instead of their BMWs. Obesity will diminish. Factories will reopen. Inequality will diminish. All good things.

Reality's been here all along.
It's just illogical and uncomfortable.
And then there's the cruelty factor,
i.e. that those in power allow this.
Recognizing them as purely simple
sociopaths allows you to get them,
but it's still difficult to accept the
ass-raping. And I don't.

We think we're losing our minds now? WW1 and WW2 - they absolutely lost their marbles! People we're downright cuckoo - couldn't make heads or tails of anything. What was real or not real! The art & literature we're outstanding in that age!!

But but -- I thought we were going to become the worlds largest oil exporter!

On related news: Cali refiners are now refusing to back an oil pipeline out of Texas into Los Angeles, and are sticking with railway for oil transport instead. Rail is expensive, but they don't want to get into any 30 years contracts for an oil pipeline when the Texas oil is mostly --- wait for it --- fracked. Yeah, refiners know what the frack is going on and they are not buying it. If they sign a 30 year deal to buy piped oil from Texas, and the fracking industry implodes before then, they are probably on the hook to buy whatever oil the Texans can shove into the pipe at their end at whatever price it takes.

I hate to inform you all (not really, 'cause I think it material and funny,,, or maybe just amusing) that of the Seven Deadly Sins which Pandora let Escape form the Box, there was an Eighth, Hope.Hope.In essence, Hope is a sin as it is neither a plan nor solution, not an action nor anything other than a promise, a vacuous promise.

You're absolutely correct. Every action taken by anyone ever is in the "hope" that the action will relieve some form of discomfort. Without that incentive, no action would be taken. Hope is the fuel that powers the engine (the means) that drives us toward our intended destination (the end).

Naked Hope in Obama's insipid sloganeering to his nation of laggards got us two terms of a presidency on permanent vacation. The socialist change of this modern liberal is to tear down what is good, elevate what is evil until they meet in the middle and there is no reason left to fight. This is utopia for the politically correct nihilists. Most of Europe is there already where Fascist Islam is poised to take over.

Extreme sensitivity to initial conditions.... but if I had to wager I'd say some sort of fascist/socialist new world order. If you look at history, (1) statism is the norm and (2) empires grow as large as they can given existing technology. There should have already been a 1984-type world given our advanced technology; the dominance of the Anglophone bloc with its weird history of freedom got in the way. Unless the tech vanishes somehow we're not going to have an anarchic "state of nature" after any collapse.

Pretty accurate assessment IMO . I see many cracks and fissures starting to appear in the foundations of the illusions . But it is still in slomo , at least for now ..............we live in massive illusions to be sure ! and illusions do not last indefinitely . PRAVDA has dictated and controlled all dialogue in the last few years and prior , but even that is starting to show signs of cracks . And that is the main source of power of the current regime and the fed . Control freaks run amok , everywhere one looks .

Last week I noticed my neighbor had an oil puddle beneath the engine of his car. I told him, "Your engine is going to seize up if you don't get that taken care of." He shrugged and went about his business.

This morning he drove up to me and said, "I've driven 500 miles since we last talked, and my engine hasn't seized. You don't know what the F you're talking about." He got out of his car satisfied that he had shown me up, walked into his house... but that oil's still dripping.

Years ago I said that to a kid with a sparkling 300ZX. He ignored it and a few weeks later showed up for work in a rental. Said he was on the way back to his place with the hottest girl he'd ever picked up(in Tampa) when the engine went dead in the middle of a the Howard Frankland bridge(about 5 miles either direction to anything) and she went home in a cab and he blew $3k on a new engine...drip, drip, drip...

He should have checked her oil on that bridge before he called her a cab. Any respectable guy would have at least attempted. Although younger gals don't respond well to having their oil checked older chics enjoy having their oil checked.

What I wonder about is the reaction when social programs are cut/inflation eats their value. These are the underemployed and unemployed.

What, exactly, do you think they are going to do? Riot a little? Block traffic? A mob does a Watts riot, which provides burning buildings and a little evening news, but how many mobs does it take to shake the political establishment?

The threat is of a threatened and po'd middle class. Wipe out private secto, like in Spain, who are politically capable (whether motivated is another thing). That's when there is fireworks.

but paul krugman says we can print our way out of this. he is a nobel prize winner. he must know something. we should print our way out of this because paul says we should. we need more natural disasters, too. more tornadoes and more hurricanes will be great for the economy. paul says it is true.

i like how he says war is good, too. 3 billion people need to die so the rest of us can work to rebuild the destruction to continue the path to infinite growth. paul knows. don't listen to this guy or anyone else who says bad, bad things are coming. they don't have nobel prizes like paul does. they don't know like paul knows.

Bought one of those fancy new 3d printers that I saw on U tube. Guy was printing food ! and Gold coins! out of thin air !!! So, i tried it. I got Cheetos that i can't eat, and gold coins that are plated lead. And, to think i paid perfectly good fiat currency to get this thing.

Bubbles pop when the internal pressure exceeds the strength of the wall of the bubble to contain that pressure (or when something 'pricks' the wall). Bubbles can be maintained, at least temporarily, if at some point the inflating gas stops entering and the wall is allowed to seal itself off.

If the gas keeps coming in, bubbles expand as their wall attempts to compensate for the increasing volume and pressure, and since there is no way to strengthen the wall once expansion has begun, no bubble's wall can hold infinitely - at some point the wall simply becomes too thin. This does not happen gradually - when the wall of the bubble can no longer contain the internal pressure, the entire wall vaporizes. It does not spring a leak - it vaporizes. Instantly.

Someone wrote in a comment from a different ZeroHedge article that we should have The U.S. Treasury Department issue a currency with which all debts public and private can be paid. The Federal Reserve Bank as an agent of the multinational banking cabal has pillaged more than enough from what was once a land of real opportunity , regardless of social class. We need to stop them from continuing to do this. How to do it without a catastrophe ocurring is the riddle to solve. Will that save the rest of the economies ? Maybe Clark and Dawe can help us with that question.

There needs to be a reset of global debt...the world's leaders (BIS?) need to sit down and draft an agreement which will simply knock off 5 or 6 zeros off of all debt....bring it all down to reasonable levels....there will be a rather radical haircut involved (think Mohawk) but we will get used to it.....they also need to revamp the tax system so that it captures the multinationals who are currently getting a free ride from the middle classes..............who will revert to working class if this is not done soon......these two things really, really, really need to be done - if not then we will have more of the same for a short while and then the world's first Great Depression (the last one did not include most of the world's population which was made up largely of peasants). Oh and a new global currency backed by gold will be needed to restore confidence going forward, of course.....please add this to the list and....don't forget the milk.

Marc Faber is going to be proved right about us not making it out the summer without the economy blowing a wheel out. Of course the wheel blew out 4 years ago now the rubbers ripped off and were driving on the Rim.

Bullshit. You 1st get rid of Holder then start to lock up the bankster CEOs, hold Bernanke and the FED members in GITMO for treason. Re-install the constitution of the United States of America, begin rebuilding the infrastructure, remove all rights from Corporations, break up the monopolies, any and all assets that were part of the attempted overthrow of the United States Government by the globalists would be confiscated and re-distributed and an open source crypto currency would be used to replace the dollar.

That's a very prosperous set of future possibilities rather than that bankster terroristic threat of collapse and devastation that keeps getting bandied about.

Don't give into their rediculous ideas. Lock the pricks up and prosper.

According to the laws of physics, conservation of information, the economy may implode into a black hole, but on the surface of the black hole, the information and all the money of the entire economy will be preserved on the suface of the black hole in the form of bits of information, or in other words a form of a 1-0 code.

So we will not lose our economy or money to the hole. It will be still in our universe, the laws of physics will be preserved, but accessing all that wealth will be god damn fucking hard work!

Went to the store today, NRP was playing an economic story on the radio. It was very upbeat, it was the announcement that the Housinf Recovery was here in earnest and home prices were again on the rise across the nation. On the back of low interst rates and a vastly improved economy, house prices were in full recovery.

I thought "You useless pricks! Sure we have a small but real bubble effect in house prices at present. It will be very, very, very short lived!"

NPR economic reporst have called housing recovery for 3 fucking years, every few months they call a new one.

As a freegold guy I can tell you that the mood our way seems to be one of high alert. We watch the gold market falling apart and the major holders consistently reporting shrinking inventories. I don't think many would be surprised if the banks did not open next week (with Monday being a holiday it would give them extra time to come up with bullshit reasons for why things aren't going to be the same going forward). If they do open then every weekend until August will be the same high alert. After that if the wheels are still on I'll be doing some re-thinking of premeses but for now I am definitely in high prep mode.

Well I call it the Attack of the Killer Algorithms and Algo Duping as technology is used to create bubbles and nobody's listening. We don't have enough tech savvy folks in DC and thus the others (banks) will take the money and run. Videos from people smarter than me explain...

So how can we fix this without 20 years of hell? How 'bout we do a selective jubilee designed to kick-start the economy, put money in actual Human's hands, along with debt forgiveness for credit cards, student loans, and upside-down mortgages?

I think instead of moaning and groaning about how fucked up things are, we need to start talking about how to really fix things for the maximum number of people, regardless of the repercussions from the 1%. Fuck them, I'm sick of them. And ANY plan with a real solution (that could be approved by the 1%) will be VERY bad for the masses and not so bad or even advantageous for them. So I say, we outnumber them, fuck them. And Bernanke too!

I've never really supported "debt forgiveness", but I do support a process of default.

If a person - or State - borrows beyond their means and is then forgiven their debts, there is no incentive for them to manage financial affairs better to live within their means in the future. No lessons are learned because the debtors believe that forgiveness soon follows a repayment crises. Another debt crises will likely happen in 10 years time. A vicious circle is created.

The people of Greece, Portugal, Argentina et al are suffering terrible hardships right now because their governments over-borrowed and stacked up enormous debts, but they refuse to default and are locked into Troika bail-outs with all the infringements of sovereignty that get included. But if their governments defaulted on unrepayable debts, sovereignty would remain intact and recovery would start the next day. And borrowers/lenders would all have learnt a lesson in life.

It appeared to some people that the big banks and their platoons of MBA traders and PHD economists gambled ( created risk ) in a " new and improved " sandbox called derivatives/swaps. Henry Paulson foisted a debt jubilee of those same banks onto the backs of each John/Jane Q. Public. He did that when he took his bazooka and bailed them out. Their debts thus magically disappeared. That was how it was written back in 1910 on Jekyll Island. Paulson used the playbook.

TARP - when seen as a process of forgiveness - is often described as 'where it all started'. But it was wrong. Not to be outdone, Obama added his own even larger bailout fund.

Not only has it allowed irresponsible banksters to get away with malfeasance and fraud, they never learned the necessary lessons and are now in a stronger position to dictate to government and continue with malfeasance. Add central bankers to that, who, faced with the reality that their QE policies have failed, call for even more of it. Like junkies claiming that the cure for drug addiction is more drugs.

It was never the duty of taxpayers to be a back-stop to corrupt banks. Standard rules of capitalism should have been deployed and allowed to play out. Although the shock may have have been more severe at the time and several banks may have disappeared, recovery would have begun sooner.

Instead of that, major economies continue in a state of deep recession with rising sovereign debts, unemployment is high and rising and innocent people are paying the price, resulting in a collapse of trust in anybody connected with banking. Civil unrest across Europe.

IMHO, virtually every action taken by the political elites and central banks in response to this crises since 2007-8 has been exactly what should not have been taken.

The insane irony of this shambles is that the very same people who created it are now in the driving seats resolving it. Is it any wonder that the crises continues and gets worse by the day?

"Although the shock may have have been more severe at the time and several banks may have disappeared, recovery would have begun sooner."

In the USA, in the 'Great Depression' aggregate demand fell and, in the 1930's, GDP declined by 28%. In the USA, in the 'Great Recession', aggregate demand fell by a greater amount than it had in the 'Great Depression' but GDP declined by 'only' 5%.

Without governments increasing their expenditures and 'loose' monetary policy, then GDP couldhave fallen by an amount greater than 28%?

I dunno. What I know from many lessons in life is that the only way to deal with any problem, is to deal with it. Not to go into denial or apply the wrong medication. But that would have exposed TPTB to blame for what's happened and required criminal prosecutions of central bankers, commercial banksters and quite a few others.

So what we've seen since 2007-8 is an attempt by TPTB to completely deny how deep the rot is and to paper over the cracks of a crises of their own making with QE, Zirp and other market manipulations, whilst claiming that economies are slowly recovering organically and just need some support while that happens. ho-ho.

But the market manipulations and lack of any real action to correctly deal with the roots of the crises have caused a major collapse in public respect, confidence and trust in the financial system.

Thus, economies haven't recovered and are actually getting worse in many respects. As countless articles and comments on ZH argue, sooner or later, the rubber will hit the tarmac and the newly created bubbles will burst. What then? Expropriation of money from anybody who still has some, to fill up the ever-growing black holes?

I am certain that when history is written about this crises it will record that policy response to it was wrong wrong wrong and actually made the crises deeper and longer. All for the purpose of protecting the power structure of the elites and their crony banksters.

I agree things can"t go on like this. The gods of the copy book headings are calling. Still there is a small chance that when the smoke clears, the post bubble world may be better and we may finally learn a lesson. With hope, I can put up with 20 years of hell.

People will "act out" based on their circumstance. Some will jump out of windows. Some will kill. Some will grab whatever cash they can steal and drive to another city or Mexico. You'll know when it's happening when you see odd news stories of bags of cash falling off a car roof and people scambling to pick it up, causing minor traffic events. Most frighteningly there will be large "events" like terrorism, military actions, threats, stagemanaged distractions. Calls for ORDER will be amplified, calls for prosecution. House break-ins and grubbing for things of intrinsic value will ensue. Hording. Religious pronouncements. Rumors! More acting out. Something terribly ugly will happen, causing a pause. The "five stages" will riddle society. Hidden enormous crimes, small crimes, aggressive enforcement. Prices GO WILD. After the blood beware the solutions, they'll be worse. Eventually trust will re-emerge in pockets. People gotta eat.

I agree things can"t go on like this. The gods of the copy book headings are calling. Still there is a small chance that when the smoke clears, the post bubble world may be better and we may finally learn a lesson.